Malev Shows Why Countries Don’t Need Flag Carriers

While last year saw very little in the way of big airlines failing, this year is already off to a quick start with both Spanair and Malev abruptly halting flights. Malev is a particularly interesting case study, because it showcases why flag carriers simply aren’t necessary for many countries anymore. There’s always someone else to step in.

Malev was born out of World War II, becoming the flag carrier for Hungary in 1946. Though at various points in its history it had designs on longer haul flying, it learned its role in the last decade as nothing more than a regional player. In the end, Malev flew mostly 737s only within Europe along with a couple of near Middle East destinations. It successfully brought people to and from Hungary, and it was well-positioned to carry some connecting traffic through Budapest, but it usually did so at a discount.

As part of oneworld, Malev was able to find a niche as a regional feeder. American had a flight from New York that fed Malev. (That flight was abruptly discontinued as soon as Malev failed.) It could also feed people to BA in London, Iberia in Madrid, and Royal Jordanian in Amman. This strategy sounded promising, but it just didn’t create a profitable business. After a couple of stints with privatization, Hungary nationalized the airline once again in 2010. The courts recently ruled that Malev had to repay illegal subsidies that it had received, and that was the end of the airline.

So Malev is gone, but does anyone care? Sure, the sentimentalists who remember the once proud airline and its long history will lament the death, but travelers? Not so much. Those in Budapest can continue to fly oneworld, but they won’t be able to fly Malev. They’ll need to connect through London or Madrid and they can then get just about anywhere they need. If they want to go east, Qatar and Turkish can take people just about anywhere. I’m guessing Etihad and Emirates will get there eventually. But that doesn’t help for short haul travel, so what about that?

In other words, shortly after Malev disappeared, all the routes with significant demand were served again. Now, is there someone who wants a full service airline to take him to, say, Rome? Probably, but is there enough demand to profitably fill an airplane? Apparently not, since even Alitalia doesn’t serve that route.

In other words, Malev had a lot of capacity in the market that didn’t need to be there, but as the flag carrier, it felt compelled to have out there. There just isn’t a need for that anymore. If a route is good, someone will serve it. If it’s not, only a flag carrier would serve it because someone decided it had to for political or national pride reasons.

Does this mean all flag carriers should disappear? No. But it means that we don’t need them either. The bigger the flag carrier, the harder it would be to replace all that capacity in such a short time, but it would get replaced eventually. That goes for a big airline like, say, American, too. That’s why I’m not a fan of the bankruptcy process in the US. Airlines should be allowed to fail and then others can step in to fill the void. But that’s another story.

What’s the point to this whole post? While it’s sad to see an airline with a rich history like Malev disappear, it’s probably better for the industry. When the weaker airlines disappear, healthier ones step in to fill the void, and most travelers end up better off.

32 Responses to Malev Shows Why Countries Don’t Need Flag Carriers

If ever you need evidence that politicians and civil servants can’t run a business look at the airline industry. As sad as I am at a carrier going bust, state subsidies (direct or indirect) for a failing business are profoundly unfair – not only on potential competitors (who wants to compete with someone who doesn’t even need to make a profit?) but also on tax payers. (I’m not opposed to structural funding as long as there is competition at some point though – like a proper tender process)

With airline subsidies you take money out of everyone’s pocket to benefit an elite few who can afford to fly frequently. In some countries a significant portion of the population never even see the inside of a plane.

Some of the political baggage I’ve seen flag carriers lumbered with over the years:
* Political interference in labor agreements
* Being required to offer free flights for politicians (or royals) either during term or for life, in some cases including family members
* Being required to operate certain routes for political expediency
* Having an unqualified government board approve all fare filings (for real!)
* Having a cap placed on fares during high demand periods (festivals, holidays) – because demand based pricing is “gouging” somehow
* Not being allowed to drop business class on short / medium length routes
* Having to divert a scheduled flight for a particular politician or political event
* Being required to achieve connectivity to as many world capitals no matter what the cost – in other words forced to enter unprofitable interline agreements

I don’t know how much of this applies in the case of Malev. The CEO job can’t have been easy, they went through 17 CEOs in 21 years!

You mention that some people never get to see the inside of a plane, bit of a disconnect there. Businesses, even publicly owned ones are in business to make money and not give the seats away. But I can kind of see where people think they are entitiled to not “pay the freight” as it were. But come the next market crash, that entitlement will go the way of the dodo.

I used Malev for my flights to eastern Europe (I am based in AMS). They offered a quality product (better than, say, AF/KL) at a lower price. For that I am sad to see them go.

On the other hand their usefulness was limited to a few routes only for me. After CSA started reducing flights (to almost 0 now, they will be the next to go belly up) they were the ones with the largest networking eastern Europe..but not any more.

The main problem that I have with low cost airlines is that they only serve short hops. AMS-ATH (one of the longest european routes) is served only by Transavia for instance, at usually pretty much the same price of KLM. And low cost carriers don’t offer the possibilities for a transfer.

Now that Malev is gone availability to eastern Europe has gone down. Perhaps not to BUD itself due to various low cost flights going in and out, but as a transfer point it has lost all it’s usefulness. While BUD is positioned very nicely in central Europe to offer transfer services.

Anyway…I guess I should try to get back the money I paid for various (now worthless) Malev tickets. Sigh..

The situation in the US is a bit more complicated than you describe, but then again, I think you know that.

IMHO, letting a US carrier fail doesn’t solve any problems — it just redresses the same problem in different clothing. Why? I’m convinced that the way labor agreements are structured is the biggest culprit. When I used to pay more attention to that kind of thing, it seemed that every pilot group was always thumping their chest to get “parity” with other groups. And each contract always has contractually guaranteed pay raises for the length of the contract.

Well, where is the airline supposed to get that extra money each year, if fares keep getting suppressed? They can’t. So they just plod along and suck it up, until they can’t take it anymore, and then they march off to BK court to bust up their contracts. We’ve seen that play out with how many airlines in the last 30 years?

If we took away the BK process in the US, things would get very, very ugly in the short term. I could imagine carriers going out of business because airlines wouldn’t agree to contracts they couldn’t keep up with, and pilots would probably not get it and go on strike to get what they want. If the carrier didn’t throw in the towel and close up shop then, it would have to later.

BTW, the USA may not have a flag carrier, but we’re kidding ourselves if we think that they don’t succumb to at least some similar political pressures.

If we go into the “fill in the void” argument that your present, I would agree with you on domestic operations. However, I wouldn’t be so quick to agree about international flights. Many foreign carriers have lower cost structures because they pay their employees less. In the USA, we can’t compete against that, and I’m not sure we should have to.

I have to disagree with you about the US airlines and bankruptcy. Cranky is right, airlines should be able to fail and the stronger ones will fill the void. The bankruptcy laws in the US have distorted the market.

In the US airlines have used Chapter 11 as a strategic tool to gain a competitive advantage against the competition at the expense of their creditors and employees. DL, NW and UA all went through bankruptcy recently (in much better economic times) and shed costs which gave them a clear advantage over AA. Now AA is struggling partly because they can’t compete against those with now much lower costs. Of course the story is bigger than that, but IMO the airline with the longer track record of fiscal responsibility is now being punished because of bankruptcy law. This has been going on ever since deregulation.

If the airline is forced to go under and there is no reorganization, the unions would quickly learn that they couldn’t push as hard as they do or they’d be completely out of a job. I still think that the industry would be better off without Chapter 11.

I don’t think I argued that BK protection is a good thing. What I argued was that it’s not so simple, and that there would be some short term ugliness if that were to happen. TBH, I think the airlines negotiate contracts knowing they can BK their way out of it if they have to.

The other airline that went bankrupt this week was also a flag carrier of sorts or I would rather say a project of flag-carrier, of Catalonia (although currently an autonomous territory within Spain, Catalonia, capital Barcelona, has a strong national identity of its own, a bit like Scotland in the UK). It was bought by the Catalan government about three years ago with the idea to build a hub at BCN. These efforts ahve obviously failed, so like in BUD is going to be Ryanair and Vueling filling the gap.

But unlike BUD, there was steady demand to BCN. However, Spanair’s costs were too high, the 2008 crash hurt them, Vueling was eating their lunch and when Ryanair came it, it was over. Why on earth would QR even consider investing in a failing carrier in a mature, overserved market like Spain I don’t know.

Malev will definitely be missed, and as you mentioned, they seemed to have something going as a regional feeder. I flew the American BUD-JFK flight a half dozen times and at least anecdotally, it seemed that the majority of passengers were transferring in BUD. I think the real losers here are the folks in smaller Central/Eastern European cities that used BUD as a transfer point. You’re right, BUD still has plenty of options especially with increases from LCCs, but places like Cluj Napoca, Romania are stuck with few and expensive options.

I remember reading that J.P. Morgan once said that too much competition destroys all competition. The airline industry is (and the railroad industry Morgan spoke of was) a classic example of this. That’s the nature of “mature” industries that once grew too much (the “dot-com bubble” was another example of a growth industry that collapsed). That’s why you’ll see more consolidation in the airline industry here.

I recently saw a piece by Peter Greenberg on YouTube (commenting on the AMR bankruptcy and the prospects for rising fares) that the U.S. airline industry has cut the capacity equivalent of a “major” airline over the last 10 years or so.

The “let them fail” argument was also prevalent when US Airways, United, Delta, Northwest, et.al. were in Chapter 11. But it seems the U.S. industry hasn’t needed a Chapter 7 liquidation. Yet, much airline capacity has essentially been liquidated.

So we are “liquidating” excess capacity in the U.S. without liquidating companies – yet. There will be more “liquidation” – especially in the regional sector. Does anyone see Air Wisconsin, Mesa, Comair or Eagle operating as independent airlines 5 years from now? I don’t. I wonder if Pinnacle will survive much longer.

There’s been a huge sea change among airline managers in the last ten years. With the AMR bankruptcy, I believe (and I could be wrong) we’re probably approaching the final phases of consolidation in the legacy space (including Southwest and AirTran). We’ll soon see it with the regionals.

I worked for a UA regional about 10 years ago. Regional dynamics are not much different than major dynamics, just played out a bit under the radar.

Regional airlines pay their pilots just like the majors do — contractually guaranteed raises every year. Back when capacity purchase agreements/fee for departure (no risk flying) was the norm, the regionals could let their costs creep up. Then, when they get too expensive, the majors switch to a different subcontractor.

So what happens? Regional carrier B gets a new contract that Regional carrier A used to fly. Regional carrier B hires a lot of pilots from Regional carrier A — and gets them at a discount, first year FO pay.

And the cycle continues. The regionals “get away with it” because there’s no major brand that gets disrupted. “United Express” still flies.

Is the word ‘flag-carrier’ valid in this case? What is a flag-carrier these days? Do they still have any significance?
I understand what a flag-carrier used to be (and in some less liberal minded parts of the world, probably still are). My idea is of a State-owned airline that had a monopoly, or at least the lion’s share, of all the prime routes out of a nation; like BOAC, Air France, Qantas and even PanAm and TWA back in the day, ‘though I realise these last two were not state owned but certainly had privileged positions in Washington’s mind and flew to all kinds of odd places presumably just to ‘carry the flag’.
Malev was privatised in the 1990s according to Wikipedia, so did it lose its flag-carrier status at that time? Probably not, as it still had pretty much a monopoly of Hungarian airline routes out of its home country. But by the time it was renationalised in 2010 (again W’pedia) the whole landscape had changed and the Airline was a shadow of its former self in terms of market share and certainly didn’t qualify under my ‘flag-carrier’ definition. It was just by then the longest established Hungarian airline.
Air India was and possibly still is considered to be the national flag-carrier but with Jet Airways and Kingfisher competing directly with them on many if not all of their ‘prime’ routes, is the term still appropriate here?
If we take Emirates or Qatar Airways, they probably still count as flag-carriers in the old-fashioned sense even though they have not been around the time that Malev was. We all seem happy to have them flying to our countries, since they go just about everywhere. If we are critical of “state subsidies (direct or indirect) for a failing business [as being] profoundly unfair”, if either of these companies were to get into trouble, how long do you think it would take for their governments to step in through one of their ‘state-owned investment vehicles’ or other sovereign wealth fund?

Countries in the EU, which basically functions as a single economic bloc, don’t need their own flag carriers any more than California or Texas needs a flag carrier. But the EU is the exception, not the rule. In other parts of the world, countries need to either have a flag carrier, or allow foreign airlines unfettered access to the market, which most countries won’t do.

That last line is key. Countries would simply be better off opening up their airspace to foreign carriers and allowing them to serve the market but they’re afraid to do it.

I feel the same way about the US. While it wouldn’t be fair to open up the market and allow foreign airlines to serve the US using cheap labor from their home market, there can be labor provisions that keep the jobs in the US regardless of the corporate structure.

Oh, and as far as I am aware, there is no law requiring US airlines to hire Americans. Assuming no labor relations problems, Delta Air Lines could easily open a crew base and hire flight attendants and pilots in Shanghai if they wanted to, and fly them into the US to work domestic flights. The law restricts foreign investment in airlines financially, but I don’t think it says anything about employees.

I don’t think we’d see more competition. I think we’d see clunky codesharing agreements replaced by full mergers, which would be better for travelers. If a new airline wanted to come in and try to beat American airlines, then it could try but my guess is that it wouldn’t succeed. Still, I’m more than happy to let them try.

And there is a law that to work in the US, you have to be legal to work in the US. It’s a bit squirrely with flights, because international airlines fly to the US but don’t have to have people legal to work in the US. To fly within the US, however, you should have to.

> Countries would simply be better off opening up their airspace to foreign carriers and allowing them to serve the market

A national air fleet is a strategic asset at places and times of instability. During the 1991 Persian Gulf war, when Saddam Hussein launched missiles at Israel (which was otherwise not involved in the conflict), foreign airlines stopped flying to Israel. The demand was there, but the global market chose a highly risk-averse strategy. I think something similar happened during the recent Arab Spring uprisings, when foreign airlines temporarily halted flights to various countries that were perceived as unstable. So at times of conflict, a national airline can be a lifeline to a country; if a country anticipates occasional periods where the international market may fail it, it would be wise to invest in keeping up a national airline even if in ordinary times it would be better served by foreign airlines.

I believe U.S. airlines also have a strategic role and are paid something by the government to keep up this capability.

I don’t think this really matters. I mean, I do think that having a civil fleet on reserve is important, but this presumes that it’s not possible to do that with foreign ownership. You can require that foreign owners make their fleets available for a fee as part of the agreement. That doesn’t mean if the countries are at war, of course, because nobody would obey the agreement. But if you have American employees, it would be incredibly difficult for anyone to take those airplanes out of the country. The US could requisition them.

It may be difficult for a foreign owner to take the planes out of the country, but the long-haul fleet is constantly going across borders and oceans, and it would be very easy for a foreign owner to keep a plane outside if it’s already there. If the U.S. government needs to command a plane in Europe or Asia to fly to the U.S. (or to perform a mission for the government overseas), it has much more leverage if the owner is American. I’m not saying that this is a knock-down argument against all foreign ownership, but control of the civil fleet is a consideration when discussing foreign involvement in the market. Probably more so for a country like the U.S. which constantly finds itself involved in global conflicts than, say, Hungary.

Sorry Ron but in 1991 I was still working at TWA and we continued to fly to TLV and CAI. We just didn’t overnight aircraft there. The flights would let off passengers ASAP and go to Rome to overnight and then fly back in the next morning to pick up passengers.

Some thoughts:
-Airberlin and NIKI coming online for oneworld should help the Eastern Europe feed.
-BUD just built a huge connection facility which is now basically a waste
-Malev costs were probably too high
-BUD doesn’t have too much premium demand, or demand in general as show by Wizz Air’s reluctance to open new routes even though its HQ in Budapest.
-Malev needed smaller E190’s or something like that

My biggest thought is that Oneworld didn’t support Malev enough. I don’t think RJ even flew there from AMM. In general oneworld doesn’t support it’s airlines enough (except cozy AA/BA). I mean just look at how Skyteam really works with all airlines to get something done.

Eastern Europe is in big trouble. Austrian will take the traffic west and Aeroflot, Turkish (and possibly QR) will take the traffic East. LOT may survive if its lucky but otherwise this will become LCC land in 2-3 years.